Strategic Management/ Business Policy

1. Strategic Management/ Business Policy Joe Mahoney

2. Corporate Governance • Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations.

3. Corporate Governance • An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service.

6. Corporate Governance • Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because it is impossible to use governance mechanisms to guarantee total compliance by the agent.

7. Agency Problems • Berle and Means (1932) in The Modern Corporation inquired whether we have “any justification for assuming that those in control of a modern corporation will also choose to operate it in the interests of the stockholders?” (1932: p. 121) • What are the “institutions of capitalism” which lessen the problem of the separation of ownership from control?

8. Agency Problems • What are the “institutions of capitalism” which lessen the problem of the separation of ownership from control? • 1. Takeovers (the market for corporate control) • 2. Recruitment of executives from outside the firm • 3. Monitoring by boards of directors • 4. Executive compensation heavily weighted toward stock options • 5. Monitoring by institutional investors

10. Agency Problems • What are the “institutions of capitalism” which lessen the problem of the separation of ownership from control? • 6. Debt (minimize free cash flow). E.g., LBOs • 7. Separate chairperson and CEO • 8. Internal control of multidivisional as a “miniature capital market”

11. Organizing the Diversified Firm • A brief history • the separation of the corporate headquarters • The types of organizational structures • U Form = single business • H Form = holding company • M Form = multidivisional • Innovative firms: Dupont, General Motors, Sears, and Standard Oil (see Alfred D. Chandler, Strategy and Structure)

12. Organizing the Diversified Firm • Three key features of organizational structure: • 1. The principle governing the division of tasks; • 2. The depth of the hierarchy (span of control); • 3. The extent of authority delegation (how much centralization?)

16. The Diffusion of the M-Form Organization

17. Evolutionary Stability of the Multidivisional Form • There are properties common to a very broad class of complex systems • physical systems • chemical systems • biological systems • social systems • business systems (e.g., Southwest Airlines)

18. Evolutionary Stability of the Multidivisional Form • Think of a hierarchy as a set of “Chinese boxes” (I.e., a box within a box, within a box, etc.) • Nature loves sub-systems! • Chemical system Biological systems • Molecules - Tissues • Atoms - Cells • Nuclei - Genes • Electrons - Chromosomes • Elementary Particles - DNA

19. Evolutionary Stability of the Multidivisional Form • Parable of the Two Watchmakers • 10,000 parts • Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts. • Watchmaker #2 has developed 100 subsystems of 100 parts. This is the “principle of near-decomposability” (I.e., a system that contains localized sub-systems)

20. Evolutionary Stability of the Multidivisional Form • Hierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements. • In organization theory this is called the effectiveness of “loose coupling.”

21. Evolutionary Stability of the Multidivisional Form • The advantage of “loose coupling” is that if there is poor performance in division 2 it does not lead to failure of the entire system. In comparison to the multidivisional structure, the early functionally centralized organizations had all activities interrelated which was not a good survival property.

22. Effectiveness of Multidivisional Form • Effective divisionalization involves: • Identification of separable economic activities within the firm; • Giving quasi-autonomous standing to each division (usually of a profit center nature); • Monitoring the efficiency performance of each division; • Awarding incentives; • Allocating cash flow to high yield uses; and • Performing strategic planning (diversification, acquisition, and related activities)

23. Weaknesses of Multidivisional Form • Dysfunctional Aspects of the Multidivisional: • Emphasis on short-term perspective; • Loss of economies of scope; • Duplication of R&D, marketing, etc.; • Emphasis on financial manipulation instead of developing firm capabilities and resources; • Large conglomerates may have excessive political power.

24. Multidivisional Form • The multidivisional structure was an adaptive response to the strategy of diversification. • “Unless (multidivisional) structure follows (diversification) strategy, inefficiency results” • Alfred D. Chandler, 1962, Strategy and Structure, p. 314 • Dupont ---> multi-divisional <------ General Motors family-owned holding company